Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating China National Chemical Engineering (SHSE:601117), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China National Chemical Engineering:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥5.9b ÷ (CN¥212b - CN¥137b) (Based on the trailing twelve months to September 2023).
So, China National Chemical Engineering has an ROCE of 8.0%. On its own, that's a low figure but it's around the 6.8% average generated by the Construction industry.
See our latest analysis for China National Chemical Engineering
Above you can see how the current ROCE for China National Chemical Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China National Chemical Engineering here for free.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at China National Chemical Engineering. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 88% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Another thing to note, China National Chemical Engineering has a high ratio of current liabilities to total assets of 65%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From China National Chemical Engineering's ROCE
Long story short, while China National Chemical Engineering has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 32% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing China National Chemical Engineering, we've discovered 1 warning sign that you should be aware of.
While China National Chemical Engineering may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.